Panel moots hike in interest on post office deposits

The Committee on Small Savings—set up by the Finance Ministry—recommended that interest rates for post office savings deposits be raised to 4 per cent from 3.5 per cent in line with the recent decision by Reserve Bank to hike rates on savings bank deposits.

The Committee headed by the RBI Deputy Governor Shyamala Gopinath in its report submitted to the finance minister also recommended that the government should introduce the system of calculation of interest rate on a daily basis on post office schemes as is being done by banks.

The committee recommended annual investment limit for the popular Public Provident Fund (PPF) be raised to Rs 1 lakh from Rs 70,000 with the tax exemption given under 80C of the Income Tax Act.

In order to discourage withdrawal, it suggested that rate of interest on advances against PPF deposits be raised to 2 per cent over the existing rate.

With regards to the Monthly Income Scheme (MIS), the Committee suggested that the 5 per cent bonus be abolished and effective rate of interest be aligned with the market rates.

Also, the maturity period of the MIS should be reduced to five years from six years currently.

Modifications

The committee while recommending discontinuation of Kisan Vikas Patra (KVP) suggested continuation of all other schemes with suitable modifications in some of them.

The committee has recommended reducing the maturity period of monthly income scheme and National Saving Certificate (NSC) from six to five years.

Recognising the need for a long term investment opportunity after discontinuation of KVP, the committee has also recommended introduction of the 10-year NSC scheme.

Significantly the committee suggested a new formula for calculating interest rates so that small savings schemes would provide better returns to investors.